Estate Planning for Business Owners
Estate Planning for Business Owners
What happens when the children grow up and no longer depend on their parents? What happens to your other “baby”- the business? Estate planning for business owners deals with personal and business assets. Business succession planning is different because it only deals with your business assets and can also take place while you’re alive. You need to have an estate plan regardless of whether you have a succession plan. Estate planning for business owners is typically more complicated because the estate plan needs to deal with the following:
- Complex business and personal relationships
- More significant and more intricate estates
- Tax issues
- Business Succession
When putting an estate plan for a business owner together, one of the most challenging conversations is around the fair or equal distribution of assets. What if one of the children is working in the business? How do you treat them? Before you begin putting a plan in place, we always encourage open conversation and a family meeting between the parents and children to provide context behind decisions. Therefore, it minimizes the surprises and offers an opportunity for children to express their concerns.
We’ve outlined the key issues below for estate planning. We know this can be a difficult conversation, so we’re here to help and provide guidance.
- Fair vs Equal (also known as Equitable vs Equal) – like what’s considered fair may not necessarily be equal. So, for example, should the daughter, that’s been working in the family business for ten years, receive the same shares as the son, who hasn’t worked in the family business at all?
- Are the adult children responsible enough to handle the inheritance? Or would they spend it all?
- Who works in the family business? Is it all the kids or just one of them?
- Encourage open conversation with parents and kids so context can be provided behind the decisions, there are no surprises and allows the kids to express their interests and concerns.
- Facilitate a family meeting with both generations; this will help promote ongoing family unity after death and decrease the chances of resentment later.
- Start looking at considerations for a succession plan for the business. (This needs to be documented separately.)
- What are your assets? Create a detailed list of your assets, such as home, real estate, non-registered investments, TFSA, RRSP, RDSP, RESP, pension plan, insurance policy, property and additional revenue sources.
- What about shares in your business? How does this need to be addressed?
- What are your liabilities? Create a detailed list of your liabilities, such as:
- Mortgage, Loans (personal, student, car), Line of Credit, Credit card, Other loans (payday, store credit card, utility etc.)
- Did you personally guarantee any business loans, and how does this need to be addressed?
- Understand your assets-the ownership type (joint, tenants in common, sole etc.), list who the beneficiaries are of your assets
- Understand your liabilities- are there any co-signors?
Make sure you have a will that:
- Assigns an executor.
- Provide specific instructions for the distribution of all assets.
- Consider a power of attorney for use when incapacitated or otherwise unable to handle your affairs.
- Always choose two qualified people for each position and communicate with them.
Taxes and Probate
- How much are probate and taxes? (Income tax earned from Jan 1 to date of death + Taxes on Non Registered Assets + Taxes on Registered Assets, Taxes on Business Shares)
- Are there any outstanding debts to be paid?
- You’ve worked your whole life- how much of your hard-earned money do you want to give to CRA?
- How much money do you want to give to your kids while you’re living?
Consider the following:
- The use of trusts.
- Use an estate freeze if you wish to gift while you’re living.
- The use of a Holdco for effective tax planning.
- Once you determine the amount of taxes, probate, debt, final expenses and gifts required, review your life insurance coverage to see if it meets your needs or if there’s a shortfall
Contact us today to help you get your estate planning in order so you can gain peace of mind that your family and business are taken care of.
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